IBM stock slid Thursday despite the tech conglomerate reporting second-quarter results that exceeded expectations, helped by a strong response to its new AI-focused mainframe computer offering. A recent rally gave IBM a high bar to clear and its software revenue slightly missed estimates.
The Armonk, N.Y.-based company earned an adjusted $2.80 per share for the June-ended quarter, up 15% from a year earlier. That beat the $2.65 per share that analysts polled by FactSet forecast. Sales increased 8% year over year to $16.98 billion, compared to analyst estimates of $16.59 billion.
On the stock market today, IBM stock lost 7.6% to close at 260.51. Shares slid below IBM's 50-day moving average and also under a previous 266.45 buy point.
IBM stock had rallied 30% for the year heading into the report. Helped by optimism about enterprise software spending in response to AI advances, shares of the more than century-old tech giant returned to record highs for the first time in a decade last September and have rallied further since then.
The company touted its AI growth in a news release Wednesday.
"Our generative AI book of business continues to accelerate and now stands at more than $7.5 billion," IBM Chief Executive Arvind Krishna said in a news release. "With our strong first-half performance, we are raising our full-year outlook for free cash flow, which we expect to exceed $13.5 billion."
One year ago, Krishna described IBM's AI book of business as reaching "more than $2 billion." On a call with analysts Wednesday, Krishna said IBM is seeing strong demand for AI agents and its open-source Granite AI models.
Along with a slight bump in its free-cash-flow guidance (from a previous description of "about $13.5 billion"), IBM reiterated its expectation to post revenue growth of at least 5% for 2025.
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Software Revenue 'Not A Standout'
IBM's overall 8% sales growth marked an acceleration from the roughly 1% year-over-year revenue increases the company posted its previous three quarters.
But sales for IBM's closely-watched software segment slightly missed Wall Street estimates, contributing to the pressure on IBM stock. Software sales grew 10% year over year to $7.39 billion. Analysts were looking for $7.43 billion, according to FactSet.
Jefferies analyst Brent Thill wrote to clients late Wednesday that IBM "software story is solid but not a standout."
Thill noted that software growth moderate to 8% year-over-year from a 9% in the first quarter when factoring in exchange rates. He reiterated a neutral hold call for IBM stock, preferring Microsoft as the two tech stock trade at similar multiples to forward earnings.
IBM's overall revenue beat was powered by outperformance from its infrastructure segment, which increased sales 14% to $4.14 billion. Analysts had previously forecast $3.76 billion in sales for the segment, according to FactSet. IBM earlier this year launched its AI-focused z17 mainframe. Krishna told analysts that sales for the enterprise data servers are off to a "very strong start."
The tech giant also managed to post a slight gain in consulting revenue, up 3% to $5.3 billion. Analysts were projecting that sales for the segment could fall by a fraction, to $5.16 billion.
Wedbush analyst Dan Ives reiterated an outperform call and price target of 325 for IBM stock following the report.
"We believe that IBM is well-positioned to capitalize on the current demand shift for hybrid and AI applications with more enterprises looking to implement AI for productivity gains and drive long-term profitable growth," Ives wrote to clients early Thursday.
IBM Stock
With Thursday's slide, IBM stock is ahead about 20% year-to-date and 46% over the past 12 months.
Coming into the report, IBM stock had an IBD Composite Rating of 83 out a best possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Further, IBM's Relative Strength Rating was 85 out of 99. The RS Rating means that IBM has outperformed 85% of all stocks in IBD's database over the past year.
